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2019-10-13 22:37:57

Endeavour Silver (EXK) experienced a pretty turbulent summer. Its share price was moving around the $1.8 level in early June. Later, it found strong support in the growing silver price, and the share price increased to $3. But in early September, silver price peaked at $19/toz and started declining to its current level of $17.5/toz. Endeavour Silver's share price started declining as well. And after the Q3 production results, which were weaker than expected, it declined back to $2.

Data by YCharts

Q3 production results were announced on October 9. Although it was expected that H2 2019 production should be higher compared to H1 2019, Q3 results indicate that not everything is going as planned. Silver production experienced a major decline. While Endeavour produced more than 1.059 million toz silver in Q2, it produced only 948,547 toz silver in Q3. It means a 10.5% decline. The decline is much bigger when compared to Q3 2018. This huge difference is caused especially by the El Cubo mine that is nearing the end of its mine life.

Source: Own processing, using data of Endeavour Silver

Gold production increased slightly, from 9,558 toz to 9,716 toz. It represents a 1.7% increase quarter-over-quarter. However, it is not enough to compensate for the huge decline in silver production.

Source: Own processing, using data of Endeavour Silver

In silver equivalent terms, Endeavour Silver's production declined by 5.4% quarter-over-quarter, from 1.82 million toz to 1.73 million toz. In comparison to Q3 2018, the silver equivalent production declined by 28.1%.

Source: Own processing, using data of Endeavour Silver

As can be seen in the chart below, the silver production decline is attributable especially to the El Cubo mine that produced 102,546 toz of silver less in Q3 than in Q2. The main issue was that the veins were narrower and ore dilution was higher than expected. As a result, the silver grades declined from 178 g/t silver to 128 g/t silver.

Although the Bolanitos mine still suffers due to the mine plan re-sequencing, it experienced a production decline of only 25,000 toz silver. This decline was nearly compensated by a significantly increased El Compas mine production. The Guanacevi mine silver production remained stable.

Source: Own processing, using data of Endeavour Silver

The good news is that things should improve in Q4. The situation should stabilize at El Cubo and El Compas and the volume of processed ore as well as the gold and silver grades should increase at Guanacevi and Bolanitos. According to Bradford Cooke, Endeavour Silver's CEO:

Our production in the Third Quarter 2019 was down year-on-year but we are seeing positive traction from all the operational changes made in the past two quarters. We expect lower operating costs in Q3 and further improvements of Guanacevi and Bolanitos tonnes and grades in Q4, 2019 which should have a positive impact on costs and production.

The bad news is that similar expectations were also before Q3. After the disappointing Q3, it is quite possible that even if Q4 is much better than Q3, Endeavour will be unable to meet its revised 2019 production guidance. To meet the lower boundaries of the guidance intervals of 4.2-4.7 million toz silver, 39,500-44,000 toz gold and 7.4-8.2 million toz of silver equivalent, Endeavour will have to produce 1.12 million toz silver, 10,171 toz gold and almost 1.975 million toz of silver equivalent in Q4. In comparison to Q3, it means an 18% increase in silver, 4.7% increase in gold and 14.4% increase in silver equivalent production. The numbers are reachable, but it won't be easy.

Another negative news is that the Terronera project seems to be facing some delays. The final PFS was expected to be completed by the end of Q3. However, in the last news release, the company states:

We continued to advance our Terronera and Parral projects with engineering trade off studies during the quarter. The mining and processing of bulk samples from each project are planned this quarter in order to complete a final PFS for Terronera and an initial PEA for Parral.

It seems like the bulk samples will be mined and processed first. It will take some time, and it is possible that the PFS won't be completed this quarter. Given that Terronera should become Endeavour's new cornerstone asset, with an average annual production expected at 2.9 million toz silver and 28,000 toz gold (5.1 million toz of silver equivalent) at an AISC of only $1.36/toz silver or $8.35/toz of silver equivalent, the delay is not good news.

The negative fundamental developments are reflected also by the technical picture that doesn't look good. The share price is falling; it is close to the psychological support at $2; however, the RSI still hasn't reached the oversold levels. Moreover, the share price crossed the 10-day as well as the 50-day moving average to the downside and also the 10-day moving average crossed the 50-day moving average to the downside. If silver price doesn't start to grow soon, the $2 support level will have a hard time to resist the downward pressure.

Conclusion

Endeavour Silver's share price stands back at $2.1 right now. Back in my early July article, I concluded that the company is like a call option on silver, with good upside potential and limited downside risk, especially due to the Terronera project. Three months have passed and several things have changed. Some developments were positive and some of them were negative. A major positive is that the silver and gold prices moved notably higher. Although Endeavour Silver's Q3 operating results were worse than expected, there is a good chance for the financial results to be better compared to Q2, due to higher metals prices.

On the other hand, production declined again, and it is hard to say whether Q4 will be good enough for Endeavour to meet the 2019 production guidance. Another negative is the delay of the Terronera project's final PFS that may lead to delays in financing and subsequently also to delays in construction and production startup. Another negative is the current technical picture which indicates that the share price weakness should last in the near term. Probably at least until November 5, when Q3 financial results should be released.

I still like the upside potential of Endeavour Silver; however, in the near term, investors should be cautious. If the $2 level is broken, another major support is around $1.8. This should be a great price to initiate a new position in Endeavour Silver or to add to the old one.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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silver endeavour production price share should million equivalent were quarter results good













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